Does New Center Make Any Sense?

All across the United States, and around the world, convention centers are vastly overbuilt. Supply exceeds demand. So municipalities that own the centers resort to price-slashing. They often lose money on their centers and have trouble servicing their debts. Nonetheless, new centers keep being built while existing centers undergo expansion.

What is the source of this disquieting information? None other than two trade associations representing the convention and meetings industry: the Destination Marketing Association International and the International Association of Assembly Managers. On August 25, 2007, they put out a report that underscored the industry dilemma. “Supply of available exhibit and meeting space across the nation currently exceeds demand, resulting in a buyer’s market,” laments the report. This buyer’s market “has exacerbated an already competitive environment, resulting in the need to discount rental rates or increase services that can create a competitive advantage.” As margins shrink, problems meeting debt service escalate, says the paper.

Carol Wallace, president and chief executive of the San Diego Convention Center Corporation, is a former president of the International Association of Assembly Managers, which copublished that paper noting the surfeit of convention center space and the resulting profit-and-debt squeeze.

The paper was published before the travel and tourism industry collapsed, points out Heywood Sanders, professor of public administration at the University of Texas at San Antonio and a recognized expert in the convention center business. In 2005, the Brookings Institution published a Sanders study that became a bombshell. He pointed out that attendance at major trade shows was no higher then than in 1993. Nonetheless, localities were engaged in a “type of arms race,” spending more and more to build and expand convention centers, despite the glut. This 2005 paper is in the process of being updated, says Sanders.

Now, in a recession that could possibly become a depression, the convention and meetings business is “manifestly down,” says Sanders. U.S. numbers have declined sharply, and 62 percent of show organizers around the world experienced a business decline last year, with 70 percent predicting a drop through the first half of this year, according to UFI (Union des Foires Internationales), the Global Association of the Exhibition Industry.

“The dynamic is exemplified by San Diego. The worse it gets, the greater demand to build more,” says Sanders. As I interview him, he goes to Google and learns that the Oklahoma City Chamber of Commerce is touting a consultant study that calls for a bigger convention center. There are others: Cleveland is pushing a medical mart, San Antonio wants a bigger center. A number of cities are considering or proceeding with plans for publicly financed hotels next to convention centers: Portland (Oregon), Dallas, Fort Lauderdale, Tucson, Kansas City, and Columbus (Ohio) are telling taxpayers that their convention centers will begin to thrive if there could just be a taxpayer-financed hotel next door. Columbus is claiming that a new hotel will lift convention center occupancy from 60 percent to 70 to 75 percent. San Diego has already subsidized a convention center hotel.

The race to build new convention centers, expand existing ones, and construct taxpayer-subsidized hotels “represents a remarkably narrow and uninformed view of larger market realities,” says Sanders. “In almost every case, a city will commission a consultant study that argues in part, based on inadequate or misinterpreted data, that the national demand for convention center space is steadily increasing and that their city will be able to attract a larger number of events and get a larger economic impact” if it would expand available space. “The reality is that this rarely happens.” And the same consultants keep getting hired over and over by competing cities.

A similar herd mentality has almost run the global economy into the ground. In recent years, economists and executives genuflected at the altar of a number of myths: that housing prices would always rise and people would always pay their mortgages; that gambling on derivatives distributed risk, rather than increased risk, ad nauseam.

San Diego is considering a 500,000-square-foot convention center expansion, along with a hotel that could bring the cost to $1 billion. The expansion would double capacity. The convention center claims it is running at full capacity. Sanders and others, including me, doubt that. “Both the Convention & Visitors Bureau and the convention center tend to count bookings whether or not the people actually show up,” says Sanders.

But even inflated numbers are sagging. ConVis reports that delegate attendance last year was down 3.3 percent. For January of this year, total San Diego hotel occupancy was down 13.7 percent, according to Smith Travel Research, which is not known for pumping up its numbers. Revenue per available room was down 20.9 percent. That last figure was worse than Anaheim, Los Angeles, San Francisco, and Orlando, according to Smith figures. In February, occupancy was down 11.5 percent, and the trend continued in the last week of that month.

In any downturn, commercial travel plummets earlier and faster than leisure travel. “In bad times, corporations immediately start to limit their travel, cancel conferences, cancel meetings, take a planned three-day meeting and make it a one-day meeting. The leisure traveler takes a little longer to react,” says Jerry Morrison, La Jolla–based hotel specialist. Thus, the big downturn in San Diego is fundamentally from the commercial side, he says.

The weakness will persist through this year “and maybe into 2010,” says Morrison. After that, economic growth will probably be anemic for several years. That will hurt commercial travel, including the convention and meetings business.

Typically for San Diego, the mayor has named a 17-person task force to report back on the feasibility of the expansion project. Even more typically for San Diego, almost all of those 17 task-force members are quintessential establishment boosters who have regularly supported corporate-welfare projects, or socialization of the risk and privatization of the gain. The task force includes both the new vice chairman of the Convention Center Corporation and the outgoing chairwoman. It includes four executives from the hotel-motel industry, two from real estate, two associated with the Regional Economic Development Corporation, and one from the San Diego County Taxpayers Association, a group that represents only a handful of taxpayers — super-rich mendicants fishing for fat government handouts.

Comments

"The bar for dealing with reality in San Diego has never been set very high.”

I am not sure whether to laugh or to cry. I just wish there was some justification to say it isn't true, but I can't think of any.

BTW:
MGM is almost bankrupt and is nearing default (to a Dubai group?!?) on the biggest private development ever in the US, and the Wynn group is down something like 80%. What a great time to be competing with Vegas on convention costs. (In case I wasn't obvious enough. the previous comment was dripping with sarcasm.)

Response to post #1: I have been predicting that the Vegas gambling industry would take a pratfall for about 20 years. Finally, it's happening. Wynn is just bringing out a new hotel, much to his sorrow. MGM is in awful shape, as you state. Eventually, that bubble was going to pop, and now it is doing so. Yes, Vegas entrepreneurs are willing to make deals. It will be no surprise if Sin City cancels its convention center expansion. Best, Don Bauder

"The bar for dealing with reality in San Diego has never been set very high.”

At one point Russia was losing about a million population each year. Even now the loss is a couple hundred thousand per annum. While this is going on you hear of grandiose building plans for enormous structures to be erected in Moscow. Such schemes are not a sign of health and vigor, but of incipient failure. The fact that San Diego has plans for a bigger, newer convention center only tells me that this town is headed for a demographic catastrophe as population adjust to current carrying capacity.

You will see houses, streets, even entire neighborhoods abandoned by their inhabitants. Squatters using derelict buildings for shelter and a base for raids on surrounding communities. Once tony neighborhoods becoming known as places where violent crime occurs everyday, and the visitor much go armed. It need not be this way, but as long as our city leaders insist on doing what benefits them and their benefactors nothing is going to change.

Once tony neighborhoods becoming known as places where violent crime occurs everyday, and the visitor much go armed. It need not be this way, but as long as our city leaders insist on doing what benefits them and their benefactors nothing is going to change.

I agree with this scenario. I believe that downtown condos will eventually become drug infested slums, as will condos in the UTC area. Rancho Santa Fe will likely become a walled enclave patrolled by machine-gun toting private security guards. I expect Mission Hills to be pillaged and sacked by rioters from City Heights when government collapses and welfare benefits are cut-off. I expect this to happen within the next two years. Today I read that T Bills are becoming impossible to sell. When the federal government's ability to borrow ends in a year or two, I anticipate a massive government breakdown and widespread rioting and crime. When the Border Patrol collapses due to lack of funding, hundreds of thousands of Mexicans will simply walk into California, and refuse to leave.

Response to post #4: Russia is a good analogy. While the place rots, the government erects magnificent buildings. It's what's going on in San Diego. While the infrastructure decays alarmingly, the plans for a civic center and expanded convention center plunge ahead. Look out for those economic studies that proclaim these projects will pay for themselves. They will be as fraudulent as those studies of the late 1990s proclaiming the ballpark would pay for itself. (It's an annual drain of at least $11 million.) Best, Don Bauder

Look at previous collapses. Nobody at the time expected them to come so fast and be so far reaching.

We're kidding ourselves if we think we're just going through a temporary "adjustment".

The changes we're going to experience in the next few years are going to be deep and lasting. Anyone who expects things to go back to "normal" will be sorely disappointed.

Meanwhile, our political and economic "leaders" are fiddling while the world burns. For San Diego to waste yet more money on a convention center expansion at a time like this shows just how out of touch they are.

The way of life we've had for the last few decades is OVER. Those who are ignoring reality and clinging to business as usual need to be removed from public office, RIGHT NOW.

The fact that the same ignoramuses who got us into this mess are now pushing this expansion shows how out of touch we are in San Diego. They've screwed us so completely that we should be covering them with tar and feathers, NOT appointing them to yet another rubber-stamp board that will make the predictable pre-ordained recommendation that sinks us further into disaster.

I'd like to personally spit in the face of each and every one of these appointees.

1 billion for an expanded convention center....? Is this a prelude to a new stadium and sports arena Mr. Mayor? Sell off the Pt. Loma sports arena property and bring them both together with new facilities in Mission Valley. That will attract Super Bowls, possibly an NBA team, concerts, etc. Both the current stadium and sports arenas are total dumps. For the 7th largest city in the U.S., when are those issues going to be addressed? New facilities will drive revenue with sponsorships, increased attendance, visitors coming back to SD, etc. If Jerry Sanders is the "strong mayor" title that he lobbied for...then show us!

Response to post #11: You have accurately described both the national and local scene. Nationally, our leaders must wake up to the fact that, at long last, consumers are deleveraging -- getting rid of debt, cutting back on consumption. Hopefully, no amount of jawboning from Washington will get them to change their minds. It's a new world, and Washington should adopt to it, rather than fight it. On the local level, you are so right: business travel will not come back soon. Why should San Diego plunk a billion into a convention center expansion? Actually, the City should plan for less use of the existing facilities. Also, it should begin insisting on accurate accounting from the center and ConVis. Best, Don Bauder

Response to post #12: New stadium and sports arena? Please. Spare me. Hasn't the City learned anything from the ballpark, which was supposed to pay for itself and is instead draining the kitty? It was supposed to stimulate nearby business and instead it is surrounded by empty condos. Subsidized stadia do not pay for themselves -- not even close. That is true everywhere. Yet cities continue to subsidize billionaire team owners, just as they construct new convention centers, even though they are overbuilt around the world. Best, Don Bauder

It's so sad that in a time when money needs to be used in a smart way , the government always finds a way to screw it up. How is it that these idiots keep getting in to office? Don't we have election to put the proper people in office that want to help fix these problems , or are elections one big azz joke. 1 billion dollars on the convention center , wow!!!! I would rather see that billion go to MTS who just lost their government funding.

Response to post #15: How do these idiots keep getting into office? The real estate development industry and other downtown establishment moguls own the San Diego elected politicians, other than Donna Frye. The last thing San Diego needs is more real estate development, residential or commercial. It desperately needs maintenance of existing assets and rebuilding of the infrastructure. But taxpayer money will be steered to new projects as long as the developers' money keeps paying the pols. Best, Don Bauder

Why do our city leaders have such an inferiority complex about our city? We're constantly in the mode of looking at what other cities have done, and fearing that we'll become irrelevant without it. Hence the crappy situations with the Padres and Chargers. Hence this convention center mess. Dear city leaders, try to remember that we do not need to imitate LA/houston/denver/chicago/vegas or anybody else. We have an amazing city here with tons to offer in terms of attractions for tourism and conventions. Let's dump the We're-almost-as-good-as-the-other guys approach. It's not pretty.

Response to post #17: Agreed: These intense feelings of inferiority were behind both the Chargers and Padres deals. But keep this in mind: other cities are not much different. The number of cities that have resisted the blandishments of pro sports owners is small: Los Angeles, San Francisco, Minneapolis/St. Paul, Boston, and a few others. New York, which suffers from a massive superiority complex, has caved in to the Yankees and Mets. It's the same with convention centers: all the cities think they can be in the top ten. They subsidize both the center and a hotel. But because of the intense price competition resulting from overbuilding, they lose. Best, Don Bauder